What can an economic recovery build upon?

There's been a lot of talk recently about the economy. Has it bottomed? Are we recovering? Will we see a "V" shaped bounce? Or a "U"? Or a "W"?
Since most of the economic numbers are still negative, it seems a little premature to talk about a recovery. Nevertheless, since the cheerleaders of the economy have brought it up, let's examine exactly what is going to lead this economy out of our deep recession.

In order to do that we must look at a topic that the Green Shoots crowd doesn't mention much - the fundamentals of the economy.

I'm going to make this as simple and uncontroversial as possible.

Since consumer spending is more than 70% of the American economy, let's start there.

This chart shows us clearly why the economy has contracted so much. It also shows a clear bottom in consumer spending. The question is whether than bottom is temporary or permanent?
To answer that we must look at the fiscal health of the consumer. There are two measurements of that - money coming in and money going out.

As you can see, workers have virtually stopped getting raises, and that assumes that people are still working.

Obviously the American worker's income is under incredible pressure, and this is translating to less buying. The tiny downward correction on the number of unemployed in the chart above is due to nearly half a million workers no longer being counted as unemployed despite not getting new jobs.

There is another element to the American consumer's balance sheet, and that is savings and debt.

While there has been a modest improvement in the debt servicing levels of the American consumer, there has been very little improvement for overall debt levels. This is a reflection of lower interest rates, not to debt actually being paid down.
The debt charts are beginning to move the right way, but they are nowhere near close to what can be considered "healthy".

The combination of higher debt and lower saving enabled personal consumption expenditures to grow faster than disposable income, providing a significant boost to U.S. economic growth over the period.
In the long-run, however, consumption cannot grow faster than income because there is an upper limit to how much debt households can service, based on their incomes. For many U.S. households, current debt levels appear too high, as evidenced by the sharp rise in delinquencies and foreclosures in recent years. To achieve a sustainable level of debt relative to income, households may need to undergo a prolonged period of deleveraging, whereby debt is reduced and saving is increased.

On the other side of the coin is America's saving and investment.

These two charts are the most damning of all. Without saving and investing there can be no sustained economic recovery. Period. This is an absolute disaster.
Not only do these charts show no bottom, they are moving in the wrong direction at a worsening rate. Until these charts reverse the fundamentals of the economy will get worse.
The IMF summed up the situation this way.

Directors observed that the crisis will have important implications for the role of the United States in the global economy. The U.S. consumer is unlikely to play the role of global “buyer of last resort”—suggesting that other regions will need to play an increased role in supporting global growth.

Not all of the economy is domestic. America does get some economic support from foreign trade.

There are signs that the rest of the world is starting to recover, but to benefit from that America will have to produce products that the rest of the world wants to buy. So far there has been no significant signs that this is happening.

Of course there is one more element of the economy that I haven't covered here, and it is booming!

Lately there has been some improved housing numbers, but there are several caveats to them. For starters, the marginal improvement in comparisons are to the disastrous selling season of mid-2008.

Secondly, 43% of all home sales last quarter were first-time home buyers. Normally that would be a good thing, but this time it is a reflection of the government's $8,000 tax credit that people are rushing to take advantage of. Some people are even using it as a down payment.
In case people have already forgotten, borrowers that require extraordinary help getting into a house are much more likely to default on their mortgages. It looks like an attempt at reinflating the housing bubble.

Finally, those small signs of price increases are due entirely to more expensive homes being forced onto the market.

The other positive economic number we've seen recently is in auto sales. This is due to the recently ended cash-for-clunkers program.

So the spiraling government debt and the two most positive economic numbers are directly linked. With that in mind you have to ask yourself, what will the economic recovery build upon?

so let us say obviously not manufacurting since policy makers seem to be hell bent on killing what's left of it!

I mean this is just driving me nuts. These people will simply not address the well known, well documented at this point, economic structural problems like the very obvious...
changing trade, corporate tax codes, getting real on supporting U.S. industry ...policies that we need and that were also promised during the campaign to get America back on the right economic track.

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I am not being flippant when I say that there will not be any kind of "useful", or meaningful" or "acceptable" (or pick your adjective) recovery, at least for us below the 95th percentile of American wealth holders. Indeed, even those above the 95th percentile are not all safe. And we (here at EP) know it!

Look back at all of the blogs and instapopulists written here over just the past 2 or 3 months. Look at the comments too. There is ample evidence and broad agreement that the gov't programs, statistics, leaders are lying about virtually everything. The research and links provided here, as well as the comments and analyses given, overwhelmingly indicate the level of corruption and outright thievery going on with our political leaders; of BOTH PARTIES!

We do not live in a functioning democracy now, if we ever really did at any time in our history. We have been, and continue to be, gamed at every turn by our government. It is the elephant in the room and it is time we see it and admit it is there. This is not a right vs left ideology admission. It is a matter of survival for the vast majority of Americans who have had their common senses dulled by 30+ years of neo-liberal dogma and have no idea how else to think. The numbers do not lie and MG, RO, RC, and others have demonstrated in numerous posts that there is a giant disconnect. Bernanke says we are beginning to recover and he saved the world from financial armageddon! How does he know? Why isn't he required to prove it and be subjected to just some of the critical analysis presented here?

Geithner said that he had THE plan and no plan B was necessary because his plan would work if we had the will to stick with it. How did he know that? And just who was his plan designed to "work" for? Why do we just accept this tripe without serious critical analysis?

I know, this is the role of Congress, right? Yeah, well I already stated that I think we do not live in a functioning democracy and I need offer no more proof than the actions (and deceit) of virtually everyone in Congress, especially in the Senate. But it has been brought to our attention over and over, right here at EP; almost daily for chrissakes!

Having said that, in all of the blogoshpere, the best suggestion I have seen so far regarding what the average citizen can do to effect a real change to current events and momentum was presented by Larry Flynt, of all people. His proposal for a national general strike is just the kind of message that the financial elites in Washington/Wall Street can understand. We may not have a lot of wealth individually, but collectively we have real power. Boycotts work, just ask Glenn Beck who has recently lost a lot of his advertisers.

Again, just look at the totality of what has been written here in just the past couple of months. Use your intelligence and common sense and acknowledge the elephant in the room. Let's do something about it ourselves. At least let us go down trying.

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Outstanding blog, says it all. And perhaps most importantly of all, there is simply too much debt --- and no one left to purchase it all --- an inconvenient factoid which appears to be overlooked by all but the most brilliant economists (such as Paul Craig Roberts, Michael Hudston and several others).

Scary and scarier.....but at least we have a phantom recovery.

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This is what I'm getting out of reading around...and since we are The Economic Populist, obviously rage against the machine is fine here...

but this is it...people are totally, completely pissed about any talk of recovery and the reason is they are getting financially screwed. I don't think people know about or care about various EIs or GDP projections are because they know....the treatment of working people in this country sucks.

All of this really goes all the way back to year 2000 but you could really go back to 1980 to get technical about it.

Kind of makes me wonder if all of this outrage, this energy from all of the people out there, the people commenting here....is going to even get lip service but you can feel the rage growing...

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I don't know how long this will last -- perhaps until happy days are here again. Maybe in 2012 we will have forgotten all this. Maybe those conspiracy theory guys weren't so crazy after all. RebelCapitalist is absolutely right on -- globalization and financialization are shrinking the middle class, and the rage you see on these forums is born of the powerlessness the middle class feels. Yes, Bernanke gets reappointed -- did we expect, Wall Street Larry instead? Same policies, whose turn is it?
The only response available to the MC is more savings, less debt, and that is becoming the default option. Here in Florida, unsold condo projects sit waiting for buyers while people find reasons to walk away from contracts or can't get financing. Maybe this is the silent populism.
Frank T.

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I'm noticing a pattern here. You are writing up posts on topics, say the FDIC is broke. Two weeks later all of a sudden we see....FDIC is running out of funds from even other bloggers, and the MSM. I think the same is true on CRE and a few other topics...

in other words is looks like you're batting average on being way ahead of the curve here is looking good!

I don't have links but I recall when you wrote that piece of flurry of others same out and said the FDIC never runs out of money and so on....

yet here we are....of course Congress will assuredly fund them but seemingly we didn't see anybody talking at all about them running out of money except your piece!

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The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index rose to nearly a year-high of 125.0 in the week to Aug. 14 from an upwardly revised 124.4 the prior week, which ECRI originally reported at 123.9.

The index's annualized growth rate ticked up to 17.5 percent after hitting a 26-year high of 14.3 percent last week, which was also revised higher from 13.4 percent.

It was the highest yearly growth rate the index has seen since the week to July 29, 1983, when it was 17.8 percent.

ok, wow, but the problem is they do not release at all what exactly their indicators are based on and also I cannot find their track record.

Then, we're looking at all sorts of economic indicators and I sure don't see "flaming growth" anywhere as you point out in your post.

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Never heard of them and know nothing of their track record, what are the details...their website says their clients are "major Fortune 500 companies".

I mean what's left to squeeze? Over in the Revised Q2, 2009, I went through the corporate profit numbers and they are clearly derived from "slash and burn", basically the employees....with that concept the work force is disposable (walk the plank, overboard!) as a method to increase profits...

that's another thing, I remember numerous studies from the 80's, 90's, when this disposable worker mantra started which showed corporations could literally layoff themselves out of business. But I guess these cats don't care because they can do a firesale and make off with some mega buck "merger" bonus.

I also find all of this beyond absurd, this pin the tail on the recession war game going on.

We have, undisputed, initial claims that are at deep recession levels. If they were at the 300's, I'd see a reason to celebrate but they are not...

it's like people are looking at this little slope delta window instead of the absolute numbers and what those absolute levels imply.

Anyway, if there is some beyond belief blow out economic growth somewhere....I'd really like to know where they are hiding it so they can share with the rest of the class!

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I just saw that the largest percentage of Stimulus dollars are to be deployed Q3, Q4 2009 so maybe that is the reason. We can already see that it's government spending which kept the GDP from free fall, plus you have this 0 interest rate helping the stock market (based on what?) feeding frenzy.

I have not looked at those deployment numbers but if it's that massive, it would temporarily put GDP on steroids potentially.

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Here is the salient information re ECRI from their report of March 18, 2009:

The end of this recession – the most severe downturn since World War II – is finally in sight. This is the clear message from ECRI’s array of leading indexes of the U.S. economy. (scroll down for chart)

What are these indicators? First, it’s ECRI’s U.S. Long Leading Index (USLLI), which has the longest average lead times of any U.S. leading index. It’s also the Weekly Leading Index (WLI), which has a shorter lead over the business cycle, but is very promptly available.

The growth rate of the USLLI turned up in November 2008, and has now advanced for four straight months. The growth rate of the WLI turned up soon after that, in early December 2008, and, as of mid-April 2009, had been rising for more than four months (top two lines in chart). A rigorous examination of the data affirms that both USLLI growth and WLI growth have been in cyclical upturns for at least four months.
....In fact, over the last 75 years, growth rate cycle upturns during every recession were followed zero to four months later by the end of the recession itself. No exceptions.

Actually, there’s been only one solitary exception in the data we have examined, which go back well over a century. This was the growth rate cycle upturn of 1930-31, which gave way to a renewed downturn. But, when this growth rate cycle upturn was beginning at the end of 1930, USLLI growth was turning back down, warning that the firming in growth would soon be reversed, effectively opening the door to depression. That’s not the case today.

We know this because the USLLI data go back to 1919, covering not only the Great Depression but also the 1920-21 depression. Another ECRI leading index has a 105-year history, covering not only those depressions, but also the panic of 1907 and the associated 1907-08 depression. All of those leading indexes, which correctly anticipated recessions and recoveries over long periods of history, are now pointing the same way.

.... Along with the rest of ECRI’s leading indexes, these developments are pointing to a business cycle recovery this year, probably by the end of the summer.

But isn’t this recession without precedent? Sure, if you consider only the run-of-the-mill postwar recessions to which most economists have fitted their models. But ECRI’s indicator systems cover not just garden-variety recessions but also jungle-variety depressions, panics and crises spanning well over a century.... And we find that this recession shares family resemblances to earlier, prewar downturns that few have systematically examined.

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In market-oriented economies, cycles in economic growth, employment and inflation are inherently cyclical. Over decades of continuous research covering dozens of economies, ECRI researchers have uncovered reliable sequences of events that occur in the vicinity of turning points in these cycles. Monitoring these durable sequences affords us unique insights into the evolution of each cycle, helping us to predict cyclical turning points.

Here is one of their testimonials:

Anything that Geoffrey Moore does I follow very closely, because he taught me Statistics 101 in college.
- ALAN GREENSPAN

Here is another one:

ECRI can justify a certain smugness now that business cycles are back in fashion. The institute called the last two recessions and the current recovery months ahead of the pack.
- HARVARD BUSINESS REVIEW, APR. 2004

You can get all the free information you want by visiting their website here. Beyond that, you need to buy their book and subscribe to their service. Hey, if it's good enough for Alan Greenspan, it should better than good for the rest of us among the great unwashed. I wonder if P.T, Barnum was a subscriber?

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if they have a good track record on prediction as they claim...let's just leave it at and "we'll see", that but I've not really heard about them much, of course I wasn't paying attention to cycles either.

Honestly, it wouldn't surprise me in the least to see high Q3, Q4 GDP here but that's because I think it's going to come from government spending/stimulus....

(although not hitting an official 10% unemployment number by the end of 2009 sure would surprise me, I don't think that's going to happen).

which the problem with a lot of this is all of the much need financial regulatory reforms, the structural policy adjustments, trade, start growing the middle class income...all of these things are getting ignored....
which makes me wonder if simply government spending is the next great bubble.

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IMHO. GDP is a mathematical formula. If you increase "G" more than the decrease in "C" (other factors being equal), you increase GDP. The only real question to be answered, at this point, is "does it pass the so what test?" In other words, does it postively impact the middle class, average, working (or hope to be soon returning to work) American citizen.

Look, I admit that I am a DFH from the 60s and therefore I'm very cynical about most "news" eminating from government. Nevertheless, I am schooled in economics and have a real belief in logic and mathematics. Accordingly, I very much appreciate the analyses of NDD and others around the blogoshpere. But I also built my professional career in international business on all of that, as well as my intuition.

Looking around me at what is happening in the "real" economy just doesn't square with what the economic indicators say. To me, that is a profound contradiction to my common sense that I can not overlook.

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Since they make their living doing economic forecasting (as opposed to places like Pimpco which have other agendas), I have some little confidence in saying that they don't want to give away the contents of their black box.

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I've been following ECRI for almost 10 years, and they are the very best at what they do, which is predicting recessions and recoveries.

These testimonials are from their website, businesscycle.com:

"ECRI is perhaps the only organisation to give advance warning of each of the past three recessions; just as impressive, it has never issued a false alarm." - The Economist, Jan. '05

"ECRI can justify a certain smugness now that business cycles are back in fashion. The institute called the last two recessions and the current recovery months ahead of the pack." - Harvard Business Review, Apr. '04

"No one speaks with more authority about the economy's turning points." - Fortune Magazine

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